M&A Antitrust Compliance—Issues before Signing and Pre-Closing

IN BRIEF

During due diligence, you should assess what antitrust risks your deal may present.

While negotiating the merger agreement, there are certain key antitrust-related provisions to keep in mind.

Even after the deal is signed, improper pre-closing conduct by the parties, or “gun jumping,” presents an antitrust risk to your client.

You’ve worked out the thousands of details necessary to close an acquisition, you’re getting close to the signing date, and then . . . your antitrust colleague asks whether the deal team considered the relevant antitrust issues that may stem from the acquisition.

Don’t wait until this question stops you in your tracks. To help you think through these important issues early, below is a practical guide—and best practices—to dealing with antitrust issues during the lifecycle of an acquisition. Of course, each transaction is different and must be evaluated on a case-by-case basis, thus we recommend you contact antitrust counsel early in the process so that he or she can provide proper guidance.

Counsel, we’re ramping-up the due diligence process; are there any antitrust issues that I need to keep in mind?

As soon as possible, you should discern the competitive relationship between the parties. This is a key point that directly influences the level of antitrust scrutiny in the contemplated deal under Section 7A of the Clayton Act, 15 U.S.C. § 18, which prohibits transactions in the United States that may “substantially” lessen competition. Other jurisdictions around the world have similar tests. In general, transactions among competitors will be viewed more critically by antitrust authorities than other transactions. To determine whether your client competes with its merger partner, you should ask questions such as whether the parties have competing products or services and whether they compete for the same types of customers.

In addition, important antitrust issues can arise in the due diligence process, particularly with respect to sharing competitively sensitive information (CSI) with your merger partner.[1] If you determine that the parties are competitors even in broad terms, your client must take precautions to protect the flow of CSI. Section 1 of the Sherman Act, 15 U.S.C. § 1, prohibits a “contract, combination . . . or conspiracy” that unreasonably restrains trade. Information exchanges among competitors can therefore be risky under Section 1 because they may increase competitors’ (and to be clear, merging parties are considered competitors until they close the transaction) ability to collude or coordinate behavior that lessens competition between or among them. For instance, competitors exchanging price information could facilitate illegal coordination among them, and there are notable examples of competition enforcers finding instances of such facilitation when reviewing merger parties’ documents during the pendency of a review.[2]

Enforcement bodies around the world—including the Antitrust Division of the U.S. Department of Justice (DOJ), U.S. Federal Trade Commission (FTC), and European Commission (EC)—will investigate the improper sharing of CSI between competitors. They have made clear that the due diligence process does not provide a shield.[3] The most competitively sensitive information includes nonaggregated data relating to: (i) pricing, including information related to margins, discounts, and rebates; (ii) other confidential, customer-specific data for current or potential customers (i.e., relating to product plans or terms that will be offered); (iii) detailed research and development efforts or product forecasts; and (iv) other forward-looking, market-facing activities.[4] Although there are many categories of information that can be shared with fewer restrictions—such as balance sheets, aggregated and/or anonymized customer information, and operational systems—note that these are just examples of common categories of CSI and not an exhaustive list of information that should be monitored.

Given the importance of due diligence in evaluating the transaction, however, there are standard ways of sharing CSI that can limit antitrust risk involved in this process. For instance, CSI can be shared with outside counsel and other third parties assisting in the evaluation of the transaction to prevent a direct exchange between competitors. Further, certain CSI (e.g., relating to costs and prices) many times can be shared on an aggregated and historic level. Additionally, you can establish a clean team consisting of a small number of individuals within the organization to evaluate the CSI. Keep in mind that clean team members may need to be screened off from certain of their day-to-day responsibilities for a period, given the sensitive information they will learn. Regardless of how CSI is shared, it should be used only for the purpose of analyzing the potential transaction and only within a small group of individuals that must see it in order to properly diligence the potential acquisition. The most important thing with any protocol that is implemented is that it establishes a clear structure that limits who can see this information and how it can be used.

If an antitrust enforcement body believes there may have been an improper information exchange, it will likely open a separate investigation.[5] This will not only expose the parties to additional antitrust risk, which could include fines, but it could also lengthen any investigation related to the deal itself.

Counsel, the deal is moving forward; what else should the deal team be doing?

Given that a merger filing may be necessary, as explained below, it is never too early to remind members of the business team that their correspondence (including e-mails, voicemails, instant messages, text messages, handwritten notes, standalone documents, and presentations) regarding the deal may be evaluated by antitrust regulators. It is imperative that the business team members be factual and accurate in their communications because overstatements or hyperbole could be misinterpreted. Recent cases and statements from antitrust enforcers show that the U.S. government has relied heavily on the merging parties’ ordinary course documents when evaluating a transaction’s potential harm or filing a complaint to block a transaction. For instance, then-Acting Associate Attorney General and former Assistant Attorney General for Antitrust Bill Baer noted that the DOJ’s “assessments of competitive effects do not simply rely on quantitative evidence provided by expert testimony; we look at likely effects as shown by qualitative evidence, including party documents and industry and customer witness testimony.”[6] This is a trend that we have also noticed in cases with the EC in which the regulator will increasingly issue questions that focus solely on the merging parties’ internal documents.

Counsel, we’re negotiating the merger agreement; what about antitrust-related provisions in the agreement?

There are several antitrust-related deal points that can be addressed in the merger agreement itself, particularly where the deal carries antitrust risk. If the parties expect a lengthy regulatory review resulting in a divestiture or lawsuit to block the merger by an antitrust regulator, they can negotiate certain terms to alleviate some of that risk. For example, a “hell or high water” provision can be included that requires the parties to see the regulatory review process through litigation with the antitrust authorities and to use all or best efforts to get a deal cleared; a divestiture provision can be included that requires the buyer to divest certain assets in order to alleviate regulators’ concerns; or a termination fee provision can be included in the event that one or both of the parties decide against completing the acquisition because of regulatory concerns. Finally, and particularly for deals that may not close for an extended period of time due to antitrust scrutiny, your client should consider timing provisions, which specify a date by which the deal must be closed.

Counsel, it’s now time to consider the merger control process; what do we need to think about?

It is important to evaluate whether any antitrust-related filings are necessary as the deal progresses. In the United States, a deal can trigger a Hart-Scott-Rodino (HSR) filing obligation that requires the acquirer to pay a filing fee and provide certain documents to antitrust enforcers. The HSR filing requirements depend primarily on the value of the transaction and the size of the merging parties. Filings may also be required in many other jurisdictions around the world, with different filing tests or thresholds—including those relating to the parties’ turnover, asset values, and market shares. Antitrust counsel should be consulted early to manage the jurisdictional filing analysis.

Failure to comply with antitrust regulatory requirements can result in substantial fines. For instance, the EC has the authority to impose fines up to 10 percent of the aggregate worldwide turnover of the parties for failing to make a merger notification. In the United States, if a party is found in violation of the HSR Act,[7] 15 U.S.C. § 18a, it can be fined up to $40,000 per day.[8] Other jurisdictions (including Brazil, China, Canada, India, Japan, and Germany, among others) also have penalties for violation of applicable merger notification laws.

Finally, as noted above, some jurisdictions require the production of documents and the submission of accurate information as part of the filing. For instance, the U.S. antitrust bodies and the EC require the production of certain deal-related documents prepared by or for any officer or director. Failure to adhere to this requirement can result in penalties for the company. The DOJ, for example, imposed a $550,000 fine against a party for failure to provide required documents, even though the DOJ ultimately found that the deal did not pose any substantive antitrust issues.[9] In the EU, the EC fined Facebook EUR110 million for allegedly submitting misleading information in its acquisition of WhatsApp.[10] These cases provide an important reminder that filing requirements must be taken very seriously.

Counsel, we’ve now signed; are there pre-closing issues that we should be aware of?

Many of the questions we get from our clients relate to the scope of proper conduct after the deal has been signed, but before regulatory approval and closing. At a high level, the rule is that the two merging parties are still separate companies and must act accordingly. That means that they cannot go to customers jointly and sell products of the future, combined company. They also cannot exchange CSI without proper safeguards in place, integrate research and development efforts, or make any public statements (in press releases or to investors) that would imply that the two companies are one.

The merging parties have every incentive to start selling the benefits of the deal to clients and investors as soon as it is signed, but antitrust regulators will focus on improper conduct in combining the two merging parties, known as “gun jumping,” before they have received a chance to review the acquisition. For example, in November 2016, the French Competition Authority fined telecommunications company SFR and its parent Altice EUR80 million for allegedly implementing two transactions before receiving regulatory clearance.[11] Two months later in the United States, the DOJ settled gun-jumping allegations stemming from Duke Energy’s acquisition of Osprey Energy Center. There, Duke allegedly took control over Osprey’s output as well as received the right to Osprey’s day-to-day profits and losses.[12]

There is, however, some pre-closing conduct that is permissible. For instance, it is permissible for your clients to tout to customers or investors the benefits of merging the two companies and to begin to plan for day one of the merged company, including discussions on how to combine corporate functions, but it is not permissible to actually combine them. Another way to address pre-closing issues, in addition to the continued assistance by outside counsel and other third parties, is to have an isolated integration clean team that has no market-facing responsibilities in either company. These clean teams have the ability to plan for integration but are not exposed to CSI from either of the merging parties. This best practice allows the parties to structure the interim period between signing and closing in a way that prevents CSI from ever traveling from one party to the other.

Finally, your clients will often be eager to announce the acquisition for a whole host of strategic reasons. In those instances, it is important to make clear in any public statement that regulatory approvals are pending and that closing will occur only after those approvals are obtained. This rule applies to shareholder calls and any other public forum where executives may be talking about the acquisition.

Counsel, we’ve got approval from the regulators; what’s next?

Once you receive approval from all necessary regulatory agencies, no further antitrust obstacles prohibit you from closing, so close! Regulatory approval often is the last hurdle before an acquisition can close, so it is not difficult to convince clients to do everything they must do in order to complete this step. Although limited, there is some antitrust risk while the companies are still separate even after any antitrust review of the deal has closed.[13] Once they have merged operations, however, the two companies are now one and cannot be liable under the antitrust laws aimed at illegal agreements between competitors.

[1] Of course, nonantitrust issues can arise during the due diligence process as well. For instance, the sharing of personally sensitive information can result in privacy concerns.

[5] The FTC highlighted this point in its recent blog post, noting that “if FTC staff uncover documents in their merger review indicating that a problematic exchange occurred, or that the parties may not have fully lived up to the protocols they established to protect confidential information, this may well result in FTC staff pursuing a separate investigation, potentially costing additional time and resources.” Vedova, supra note 4.

[13] For instance, as the FTC recently noted: “[companies] must also be conscious of the risks of sharing information with a competitor before and during merger negotiations—a concern that remains until the merger closes.” Vedova, supra note 4.